The ‘leveraged loan’ time bomb just exploded

Explosion - Photo by U.S. Army

These “leveraged loans,” issued by junk-rated over-leveraged companies, form an $800 billion market. They’re too risky for banks to keep on their books. So they sell them directly or as Collateralized Loan Obligations (CLOs) to institutional investors. The Fed has been fretting about leveraged loans for two years; they can sink banks that get stuck with them, as they did during the financial crisis.

Leveraged loans trade like securities. But the SEC, which regulates securities, considers them loans and doesn’t regulate them. No one regulates them. This gives issuers and banks a lot of leeway.

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